Can You Borrow Money From Your Current Accounts?

When individuals need funds, they often consider options beyond traditional loans. Borrowing from “current accounts” generally refers to accessing one’s own accumulated assets or existing financial vehicles. This approach allows individuals to leverage their savings or policy values as a source of liquidity. Each account type involves specific rules and potential implications.

Borrowing from Employer-Sponsored Retirement Plans

Employer-sponsored retirement plans (e.g., 401(k)s, 403(b)s) sometimes allow participants to borrow against their vested account balance. These are loans from one’s own retirement savings, not traditional third-party loans. Loan availability and terms are set by the plan document.

The maximum loan is the lesser of 50% of the vested balance or $50,000, with an exception allowing up to $10,000. Repayment is typically within five years, or up to 15 years for a primary residence purchase. Payments are usually made through after-tax payroll deductions, with interest paid back into the participant’s account.

If the loan is not repaid, it defaults and is treated as a taxable distribution. If the individual is under age 59½, a 10% federal early withdrawal penalty may apply. If employment ends, the outstanding loan balance may become due sooner, often by the tax return due date of the following year, or it will be considered a taxable distribution.

Borrowing from Cash Value Life Insurance

Certain permanent life insurance policies (e.g., whole life, universal life) accumulate cash value over time. This cash value grows tax-deferred and can be accessed by the policyholder. A policy loan is taken against this cash value, which serves as collateral. Loans are generally not taxable income as long as the policy remains in force.

Interest accrues on the outstanding loan balance. While there is no strict repayment schedule, unpaid interest can cause the loan balance to grow, reducing the policy’s cash value and death benefit. If the loan balance, including accrued interest, exceeds the cash value, the policy can lapse.

A policy lapse with an outstanding loan can trigger significant tax consequences. The outstanding loan amount may become taxable income if it exceeds the policyholder’s “basis” (premiums paid). This means an unexpected tax bill on previously tax-deferred gains. Policy loans require careful management to avoid adverse outcomes.

Accessing Funds from Individual Retirement Accounts

Individual Retirement Accounts (IRAs), including Traditional and Roth IRAs, do not permit direct “loans” like employer-sponsored plans or cash value life insurance. Instead, individuals access IRA funds through withdrawals, subject to specific tax rules. For Traditional IRAs, withdrawals are generally taxed as ordinary income. Withdrawals before age 59½ are typically subject to a 10% federal early withdrawal penalty in addition to ordinary income tax.

Several exceptions exist for the 10% early withdrawal penalty, though the withdrawn amount may still be taxable. These include withdrawals for a first-time home purchase (up to $10,000 lifetime limit), qualified higher education expenses, unreimbursed medical expenses exceeding a certain percentage of adjusted gross income, disability distributions, or substantially equal periodic payments. Recent legislation also introduced exceptions for emergency personal expenses and domestic abuse victims.

A “60-day rollover” is another method to temporarily access IRA funds without immediate tax consequences, but it is not a loan. This rule allows an individual to withdraw funds from an IRA and redeposit them into another eligible retirement account within 60 days to avoid taxation and penalties. This indirect rollover is generally limited to one per 12-month period across all IRAs.

For Roth IRAs, qualified distributions of contributions are always tax-free and penalty-free because they were made with after-tax dollars. Withdrawals of earnings from a Roth IRA are tax-free and penalty-free if the account has been open for at least five years and the owner is age 59½ or older, or meets another qualified exception.